How To Protect Your Business in a Divorce

Like most people who get married, I never intended to get divorced. However, like more than 50% of all marriages nowadays, mine unfortunately did end in divorce after seven years. As a business owner, this created a more complicated economic situation than many people in this position typically face.
When you are an employee, your alimony is calculated mostly based upon your income. When you own your own business, however, things aren’t so simple. First of all, I will discuss what I would have done had I planned better for this outcome. As in most areas of life, prevention is better than a cure. That is, the best time for business owners to prepare for divorce is before it happens.

How to Protect Your Business Before a Divorce

If you are currently married or about to get married, here are some suggestions for protecting your business. Hopefully, you will never get divorced. However, it’s better to prepare for the worst so that if it does happen you aren’t blindsided.

Prenuptial Agreement -This is the best way to ensure that your business isn’t affected by a divorce. If you and your spouse sign a written agreement that protects your business, you won’t have to worry about this. A variation on this is a postnuptial agreement, which is signed while the partners are already married. Both pre and postnuptial agreements can be tricky to navigate for emotional reasons. After all, you are openly bringing up the possibility of divorce in the future, which is never a pleasant thing to contemplate. Yet it can still be the most practical way to protect your business and other assets.

Create a Partnership or LLC -It’s possible to set up such business arrangements in a way that prevents your spouse from becomes co-owner of the business in the event of a divorce. This is something you must thoroughly research, as it has many implications beyond the issue of divorce. You should consult with an attorney to find out if this is the right kind of setup for your business. There are many types of lawyers, so make sure you hire one who specializes in business.

Limit Your Spouse’s Involvement -The more involved your spouse is with your business, the larger the share he or she will be entitled to if you ever split up.

How to Protect Your Business After a Divorce

Unfortunately, I did not follow any of the recommendations listed above. Not only was there no prenuptial or postnuptial agreement, but my wife was an employee of my business. Since many other people find themselves in the same situation, it’s worth exploring what you can do if you are getting divorced and want to protect your business as much as possible.

Sell the Business -This is, in fact, what I did. It’s far from the ideal scenario, but many people are compelled to do this after a divorce. When you sell the business, you simply divide up the proceeds with your ex-spouse. This, of course, does not really qualify as protecting your business. It does, however, conclude the matter and hopefully leave you with enough assets to start over.

Enter Into a Payout Agreement -In this situation, you agree to an arrangement where you pay off the ex-spouse’s share. This allows you to keep your business, but you will have to pay off the equivalent value with interest.

Use Other Assets to Pay Your Spouse -If you have cash, real estate or other investments that can be used to pay your spouse, you can do this instead of splitting up control of the business. I was not able to do this, but if you have a profitable business as well as other assets you are willing or able to give up, this is definitely an option to consider.

Protecting Your Business Takes Careful Planning

The best time to start protecting your business is before you get married. The next best time is while you are married. The worst time is after you are divorced. Still, you have to deal with the current situation, whatever that might be. The bottom line is that if you are married or divorced, you should carefully calculate your assets and consult with an attorney. This can help you come up with the best strategy to protect your business in the best way possible.

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James B. Gustafon is a former business consultant and entrepreneur with over 20 years of experience and a wide variety of knowledge in multiple areas of the industry. He currently resides in Austin, TX and spends his time helping consumers and business owners alike try to be successful. When he’s not reading or writing, he’s most likely with his beautiful wife and two children.

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